President Trump vs. the US Federal Reserve

Suprising Comments about Powell

On Monday, the 20th of August, President Trump was interviewed by Reuters, to whom he expressed his dismay with the current Chairman of the US Federal Reserve, Jerome Powell. Powell, who ascended to the position of Chairman of the US Federal Reserve in February of this year, has been working at odds with what President Trump thinks to be the soundest monetary policy for the time being. “We’re negotiating very powerfully and strongly with other nations,” Trump said. “We’re going to win, but during this period of time, I should be given some help by the Fed.^[1] ”

That goes back to two main approaches that the Fed is taking at the moment:

1. Increasing interest rates.
2. Reducing its holdings of Treasury and mortgage-backed bonds

Why Trump Is Dissatisfied with the Fed’s Policies

Since the beginning of the Trump presidency in January 2017, the Federal Reserve has enacted five hikes in interest rates and is expected to implement yet another two this year, the first of which is expected to come in September. Currently, the benchmark lending rate stands at a range of 1.75% to 2%.^[2]

Meanwhile, Japanese and European authorities are holding their interest rates near zero. This resulted in more demand on the US dollar, which, in turn, brought about an increase in its value against these other currencies. This has made American products less competitive, which, of course, does not serve President Trump well in his attempts to reduce the country’s trade deficit.^[3]

A major aspect of Trump’s trade disputes with China and Europe is the weakening of their currencies for the sake of raising their products’ competitiveness, and so, given how personally Trump tends to take any form of opposition to his policies, he views the Fed’s policies as a stab in the back.

In July, Trump tweeted:

 “The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”

For its part, the Fed’s rationale behind raising the interest rates is to act as a balance against the extraordinary growth that has taken place in the last 1½ years, the decline in unemployment rates, and the tax cuts that were enacted last year. It is feared that, were the economy to remain operating at this pace, it could cause an episode of steep inflation.

As was stated in the minutes released from the Fed’s policy-making meeting that was held on July 31 and August 1 in Washington, “a prolonged period in which the economy operated beyond potential could give rise to inflationary pressures or to financial imbalances that could eventually trigger an economic downturn.”^[4]

Trump Powell Relationship

This is not President Trump’s first public feud with the Chairman of the Federal Reserve. Before Jerome Powell was nominated for the position, Trump spent some of his early time in office publicly casting blows at the previous chair, Janet Yellen, whom he claimed had been implementing a joint scheme with former President Barack Obama aimed at keeping the interest rates at low levels to affect the country’s economic performance under Trump’s administration. Eventually, President Trump was advised by some of his key aides to quit making such statements for their negative repercussions on the financial markets.^[5]

Now, perhaps emboldened by the fairly solid figures that the US economy has scored in the last two years, Trump has decided that he has enough credit to make his enmity with the current Chair of the Federal Reserve public. This time, his problem with Chairman Powell is actually the opposite of that which he had with Yellen; he does not want the interest rates going up. “I don’t like all of this work that we’re putting into the economy and then I see rates going up,” said President Trump to CNBC.

The Independence of the Federal Reserve

The concern about the situation in which Trump has put himself and the US Federal Reserve lies in two potential scenarios; on the one hand, the Fed could decide to halt the rise of rates, and on the other, it could proceed with its previously declared intentions of applying two more increases throughout 2018. Given President Trump’s inclination to politicize certain non-political aspects of government, these two scenarios can result in one of two perceptions: either the Fed would be seen to be subordinated by the presidency, which, in turn, would result in skepticism regarding the Fed’s independence, or it would be seen as defiant of the president, which would go against its supposedly apolitical nature.

It has been a custom adhered to by US presidents for a few decades and formalized under President Bill Clinton: presidents do not publicly comment on the Federal Reserve’s actions. The rationale behind this is that both institutions work on completely different scopes. Whereas the presidency is a short-term political matter, the Fed’s work is concerned with the long-term well-being of the US economy and should not be hindered by the often myopic political agendas pursued by the presidency.

A story that has been invoked by critics of Trump’s Fed-related comments involves former President Richard Nixon—not the first time where parallels are drawn between the two presidents. As the 1972 presidential elections drew closer, President Nixon exerted pressure on then-Fed Chairman Arthur Burns to lower the interest rates in order to spur economic growth. What that resulted in was a drastic increase in prices that forced Paul Volcker, one of Burns’ successors, to raise the interest rates up to 20% in order to curb the inflation. Powell himself once referred to this story in a speech in May when he said:^[6]

 “We must not forget the lessons of the past, when a lack of central bank independence led to episodes of runaway inflation and subsequent economic contractions.”

President Trump’s Intentions

One of the common opinions in financial and economic circles regarding Trump’s attacks on Powell is that he is framing Powell as a potential scapegoat in case his trade policies backfire. “He is just setting up someone else to blame if things don’t go according to his plan,” said founder and chief investment officer of Potomac River Capital LLC, Mark Spindel.

Trump seems to have backed away from his attempts to pressure the Fed in fear of unnecessary harm to the financial markets. In his interview with CNBC, Trump said: “I am not happy about it. But at the same time, I’m letting them do what they feel is best.” Such prudence is understandable given that Powell is a Republican who was nominated by the president himself and approved by a predominantly Republican Senate.^[7]

White House spokeswoman Lindsay Walters went on to say to Business Insider that “Of course the president respects the independence of the Fed. As he said, he considers the Federal Reserve Board Chair Jerome Powell a very good man and that he is not interfering with Fed policy decisions.”^[8]

Now, how is Chairman Powell expected to react?

At the moment, Powell continues to restrain from commenting on the President’s attacks. Whether Powell will eventually succumb to the President’s wishes or he will stand his ground as the lawyer that he is and act independently of any political pressures is yet to be known. For now, it doesn’t seem likely that he will relent and seems to be prepared for the September interest rate hike.^[9]

^[1] https://www.aol.com/article/finance/2018/08/20/reuters-trump-says-hes-not-thrilled-with-feds-powell-for-raising-interest-rates/23505829/

^[2] http://www.latimes.com/business/la-fi-fomc-minutes-20180822-story.html

^[3] http://fortune.com/2018/07/21/jerome-powell-fed-trump/

^[4] http://www.latimes.com/business/la-fi-fomc-minutes-20180822-story.html

^[5] https://www.ft.com/content/1fa6b7c4-bf24-11e7-b8a3-38a6e068f464

^[6] https://www.politico.com/story/2018/07/20/trump-federal-reserve-powell-criticism-702248

^[7] http://fortune.com/2018/07/21/jerome-powell-fed-trump/

^[8] https://www.businessinsider.com/trump-fed-chair-powell-interest-rates-comments-gop-fundraiser-2018-8/

^[9] http://www.latimes.com/business/la-fi-fomc-minutes-20180822-story.html